Sebi seeks forensic audit of MCX's trading software

Mumbai, Jan. 24 -- The Securities and Exchange Board of India (Sebi) has directed the board of Multi Commodity Exchange of India Ltd (MCX) to commission a special audit of its trading software, according to two people familiar with the development.
The software is owned and operated by Financial Technologies India Ltd (FTIL), renamed 63 Moons Technologies Ltd.
"Sebi had written to MCX in December, seeking a forensic audit. This is after a general examination of its systems in September 2016. That addressed some issues but the pending ones can be addressed only through a special audit," said one of the two persons cited above.
The terms of reference for the audit are along two broad themes. The first is to ensure that MCX is using the best available software and ascertain whether any undue influence had been exerted on it to continue using FTIL software. Second, the regulator wants to determine if FTIL software has given any unfair advantage to trading members who use FTIL software for their own operations.
A copy of Sebi's letter to MCX has been reviewed by Mint. An email sent to Sebi was not answered.
"63 moons technologies (FTIL) had issued the licence for operating the said technology to MCX in 2003 and the same has been functioning perfectly till date. The regulator has sought MCX to conduct an audit of the system, hence we will not be able to respond on the same," said a spokesperson for FTIL in an emailed response.
Sebi, in its letter to MCX, said the special audit should examine FTIL and MCX software for preferential access to members who use FTIL's trading software ODIN.
The regulator wants to know if FTIL software is being used to gather price sensitive information and whether it is being shared with select traders or employees.
Sebi also wants the special audit to establish that FTIL's technology pact with MCX is based on sound technology reasons. "The audit firm can collect bank statements of key exchange officials to find out whether any abnormal funds have been transferred to their bank accounts and (find out) source of such funds," said the Sebi letter to MCX.
This comes two-and-a-half years after FTIL moved out of the management and as a promoter of MCX. FTIL sold its 26% stake in MCX in 2014, out of which a 15% stake was acquired by Kotak Mahindra Bank in July.
"MCX has already started to look for a forensic auditor and is expected to submit its report to the regulator by April," said the second person cited above.
In December 2013, Forward Markets Commission (FMC), the former commodity markets regulator, ordered MCX to appoint a forensic auditor to scrutinize, among other things, related-party transactions.
The auditor, PricewaterhouseCoopers (PwC), submitted its report to FMC and MCX in early 2014. But a detailed examination of FTIL's software was not a part of the special audit. The PwC report had said that the technology pact between MCX and FTIL was skewed in favour of the Jignesh Shah founded-technology company.
"It (MCX) was unable to enjoy adequate bargaining power at the time of negotiating technology support and business support agreements," PwC said in its report in 2014.
After the PwC audit, in September 2014, MCX had renegotiated its technology contract with FTIL, making it a 10-year long pact. The previous contract was extendable up to 99 years.